The 1960s were years of difficult challenges to U.S. policy makers and of
important initatives to meet them. In November 1999 the Brookings Institution and Yale
University jointly sponsored a conference to reconsider the national economic policies of
the 1960s and the theories that influenced them, in light of subsequent events in the
economy and of developments in economic theory and research. This volume contains the
papers and comments of the participants.

Several of the contributors to this volume were involved in policymaking in the 1960s.
Their papers provide firsthand insights to the analyses and priorities of that period and
a prelude to examination of subsequent ideas and policies. Younger scholars represented in
the volume bring different perspectives. All participants have been active in economic
research since the 1960s; collectively they represent a wide range of expertise in
economic analysis.

This volume is dedicated to the memory of Arthur Okun, a major figure in economics and
economic policy throughout the Kennedy-Johnson era, at Yale, at the Council of Economic
Advisers, and at Brookings. He served as chairman of the council and chief economic
adviser to President Johnson. At Brookings, he and George Perry founded the Brookings
Panel of Economic Activity and its journal, Brookings Papers on Economic Activity.

George L. Perry is a senior fellow at the Brookings Institution.
He and William C. Brainard direct the Brookings Panel on Economic Activity and are
coeditors of its journal, the Brookings Papers on Economic Activity. Perry is the
author of books and numerous articles in professional journals. James Tobin is
Sterling Professor of Economics Emeritus at Yale University and a recipient of the Nobel
Prize in Economic Science. He is author or editor of numerous books and articles.

Preface

In November 1999 the Brookings Institution and Yale University jointly
sponsored a conference to reconsider the national economic policies of the 1960s and the
theories that influenced them in light of subsequent events in the economy and of
developments in economic theory and research. This volume contains the papers and comments
of the participants.

The beginning of the Kennedy presidency in 1961 was widely perceived to bring to
Washington a "New Economics." John F. Kennedy, as senator and presidential
candidate, had sought the advice of academic economists. As president, he appeared to be
more interested in economic analysis and in the ideas of economists and their policy
implications than had been his predecessor, Dwight Eisenhower. This interest was reflected
in the appointment to his administration of a number of academic economists. Their work
was at the forefront of current research, and their views were informed by Keynesian
ideas, as modified and integrated with traditional theory after World War II. But what was
truly new about the New Economics was that it became a strong intellectual force in
government.

As Kennedy was being inaugurated, the economy was at the bottom of a recession, the third
since 1953. The unemployment rate was 7 percent, compared to 3 percent at the end of the
Korean War and 4 percent at the peak of the expansion in the mid- 1950s. Improving the
disappointing performance of the economy was the most urgent challenge to the new
administration. Debate raged as to how much of the increase in unemployment was structural
-- that is, attributable to changes in demographics and labor market institutions -- and
how much was cyclical-that is, attributable to shortfalls of aggregate demand for goods
and services. Had the unemployment rate at full employment risen, or was employment less
than full? The distinction was more than academic. If unemployment was cyclical, it could
be remedied by federal fiscal and monetary policies. If it was structural, then fiscal and
monetary stimuli to demand would be inflationary. The Eisenhower administration and
Federal Reserve Chairman William McChesney Martin held the structuralist view, while the
Kennedy economists thought the unemployment problem was amenable to active fiscal and
monetary policies designed to stabilize aggregate demand at full-employment levels. The
expansionary policies of the first half of the decade reflected their analysis. So did the
policies to restrict aggregate demand that were eventually undertaken by the Johnson
administration and the Federal Reserve during the Vietnam War.

Some observers today credit the New Economics and its influence on the policies of the
Kennedy-Johnson years for the sustained prosperity of the 1960s, and thus regard them as
an example worth emulating. Others see the legacy of those policies in the 6 percent
inflation rate at the end of the decade, when unemployment fell to 3.5 percent-a level too
low for stability. That period was followed by the stagflation of the 1970s. In the
economics profession, the idea that activist discretionary policies could produce and
preserve stability came under attack. The natural rate of unemployment, rational
expectations, the new classical economics, and real business cycle theory offered powerful
theoretical arguments against the economics of the 1960s, which -- rightly or wrongly --
charged with overstimulating demand under the mistaken expectation that lower unemployment
could be sustained at an acceptable increase in inflation.

The attempt to stabilize the economy at high levels of employment was not the only
hallmark of 1960s economics. Policymakers had to contend with the dollars evolving
role in the world and its eventual overvaluation, which marked the beginning of the end of
the Bretton Woods system of international financial arrangements. Tax changes were aimed
at encouraging investment for long-run economic growth. And significant initiatives were
taken to strengthen the nations social safety net, including the introduction of
Medicare. Thus while stabilization issues most clearly defined the decade for economists
and are the subject of some papers in this volume, other papers examine developments in
these other spheres -- international, fiscal, and social as viewed through the lens of
economics.

The conference was also a tribute to the memory of Arthur Okun, a major figure in the
economic policies throughout the Kennedy-Johnson era, in Yale economics, and at Brookings.
The subject matter and scope of the conference reflect Okuns interests and
contributions, cut short by his untimely death in 1980 at the age of 51. Okuns
public service began early in 1961, when he was still at Yale. His colleague James Tobin
had become a member of Kennedys Council of Economic Advisers and stayed in close
touch with Okun. This council was trying to convince the new president and his political
team of the need for expansionary policies to bring unemployment down from 7 to 4 percent.
The White House was not impressed by the gain in employment from 93 to 96 percent, which
JFK likened to raising a college grade from A-to A. Was that achievement worth
the political cost of risking a budget deficit? The council knew that the overall economic
gains that would accompany the three-point decline in unemployment were much more
important than the White House metaphor suggested. In making the point concretely, Art
Okun produced what came to be known as Okuns Law. Time has proved it to be one of
the most reliable and important empirical regularities in macroeconomics, a signal
contribution to economic knowledge as well as to practical policy. JFK committed himself
to a 4 percent unemployment target. Okun soon came to the council staff, where he worked
together with the two chairmen of this conference. He later became, on leave from his
professorship at Yale, a member of the Council of Economic Advisers under President
Johnson and ultimately its chairman.

Then, in 1969, he came to Brookings where, with George Perry, he setup the Brookings Panel
on Economic Activity and its journal, the Brookings Papers on Economic Activity,
and where he resumed his research in economics -- research that reflected his trademark
devotion to both rigor and relevance. Two books he wrote during the 1970s are still widely
cited. Prices and Quantities foreshadowed many current insights in macroeconomic
theory, and Equity and Efficiency appears on many college reading lists as an
accessible analysis of a basic tradeoff that confronts economic and social policies.

Several of the contributors to this volume were researchers who were involved in policy
making in the 1960s. Their papers provide first hand insights to the analyses and
political priorities of that period and a starting point for examining subsequent policies
and economic ideas. Younger scholars represented in the volume, who know that period only
as a part of history, bring a different perspective. All participants have been active in
economic research since the 1960s and collectively represent a wide range of expertise in
applied economic analysis. Subject to writing within a broad area, each author was free to
choose the particular subject of his paper. Four of the papers concern macroeconomic
stabilization and growth. William Baumol probes the heart of the capitalist growth
process, modeling the relation between spillovers from innovation and income distribution
and how these affect overall living standards and inequality. William Brainard and George
Perry assess stabilization policies from the 1960s to the present using a model that
challenges today's prevailing views of the options confronting policymakers. Paul Krugman
explores why in recent years the economics profession has largely ignored the role of
fiscal policy in stabilization. Robert Solow examines the model of economic growth that
informed the Kennedy Council of Economic Advisers' analysis of the longer run and relates
it to subsequent developments in growth theory. Richard Cooper and Barry Eichengreen each
analyze U.S. foreign economic policy in the watershed period when the Bretton Woods system
was coming under pressure, and relate those events to subsequent developments in the
international monetary sphere. Robert Haveman analyzes the changing faces of poverty over
the last four decades, and Alan Krueger examines the shifting emphasis in labor policy and
labor research over that same period.Together, these economists have provided a fitting
tribute to Arthur Okun and his legacy.